One segment of the economy that financial institutions invest money in is real estate. The financial institutions that invest in real estate include banks, savings and loan associations, pension funds, insurance companies, mortgage banking companies, credit unions, real estate investment trusts (REITs), and state agencies. The financing may be done on a debt basis, where the investor receives a mortgage, or an equity basis, where the investor receives an equity stake in the investment. A variation on debt financing of real estate is purchasing mortgage-backed securities. The purchase of mortgage-backed securities is a type of loan participation where the investor buys an undivided interest in an aggregate of mortgage loans.
An investment transaction in the real estate market generally goes through a cycle of several steps beginning with the initial inquiry and ending with the closing of the deal if it is approved. Typically, the inquiry step begins with an employee of the investor called an originator. The originator receives inquiries from customers or looks for transactions in which the investor can place money. The originator will often spend a significant amount of time collecting information about an investment opportunity to determine whether it is a desirable investment for her employer. The originator's work can include collecting due diligence information from the customer about the customer's business and the property that will secure the investment. The originator will often discuss the potential transaction with a risk manager to receive an initial opinion on whether the transaction will likely be approved. If the initial indications are favorable, the originator typically prepares a preliminary application for review by management. Management's review of a preliminary application generally involves several steps of review by various risk managers that can take two to three weeks. In situations where the preliminary application is not approved, the originator often works with the customer to modify the terms of the transaction to make them more acceptable.
Once the preliminary application is approved, the originator works with the customer to prepare a detailed loan application describing the transaction for review by management. Upon receipt of a detailed loan application, the underwriter for the transaction conducts an audit of the customer and the deal. Before a transaction closes, it typically goes through several stages of review by management personnel within the investing institution. Management personnel review transaction packages to determine whether they are within risk and pricing parameters established by the investor. The risk and pricing parameters generally fluctuate and can involve complex analysis of many factors. If the transaction satisfactorily meets the risk and pricing parameters, management approves the transaction for closing.
Currently, there are certain tools available that assist loan originators and managers in reviewing loan applications. The conventional software tools available typically comprise a static spreadsheet that examines a particular factor for a single financial product. There are also a variety of checklists and guidelines that consider different factors that can affect the financial product. However, there is no comprehensive tool that simply and quickly evaluates a variety of factors for different types of real estate investments to determine whether it is a favorable transaction.
There are several limitations with the current system of processing real estate investment packages. First, the time spent from the initial inquiry to the preliminary approval is too long. Customers often have to wait more than a month after making an inquiry on a transaction to learn whether they have received preliminary approval. Second, the review process can appear to be subjective and arbitrary to the customer. For example, the investor may alter the terms of the transaction or reject the transaction all together during the several stages of review that the application undergoes. Finally, the employees of the investor can waste a significant amount of time on deals that are unlikely to be approved. Both the originator and the management reviewing the transaction can spend considerable time preparing an application and reviewing it before it is determined that the transaction is unlikely to be approved.
In view of the foregoing, there is a need for a system and method that can efficiently evaluate real estate transactions to determine the probability of them ultimately being approved. Specifically, a need exists to make a rapid determination, based on preliminary information from the customer, as to the probability of the transaction being approved. Making this determination provides the customer with an early indicator as to the likely success of the transaction. A further need exists to combine the various data sources used to evaluate a transaction into a single, user-friendly package. A simplified evaluation tool also helps the originator and reviewer avoid wasting significant time on transactions that are unlikely to be approved. Moreover, making the investor's employees more efficient reduces the investor's costs and increases the speed with which transaction packages can be processed.